TheMReport — News and strategies for the evolving mortgage marketplace.
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32 | TH E M R EP O RT FEATURE F or the past few years, there has been pent- up excitement about credit expansion to make homeownership more accessible for credit-worthy consumers. It is not difficult to understand why with mortgage rates at an all-time low and no shortage of first-time buyer programs with relatively low down payment requirements. Also, the economy is more favorable than it has been in years. And yet, home sales and mortgage volumes seem over - whelmingly "blah." What exactly is holding back the would-be homeowner? Overly-stringent credit require - ments continue to needlessly prevent millions of Americans from building wealth through homeownership. As property values continue to rise, legions of prospective borrowers remain side - lined. Many of these borrowers are qualified for loans but think they are not, so they don't even try. For many borrowers, the most significant challenge is to figure out a way to ease wrinkles in credit history as past foreclosures carry the most weight. There have been more than 20 million foreclosures since 2010, most of which involved more than one borrower. That means as many as 40 million Americans cannot qualify for a traditional Fannie Mae loan. Typically, consumers must wait seven years for a past foreclosure to clear before they can qualify for conventional financing. Foreclosure volumes peaked before 2014. Since then, many people who had a foreclo- sure have had an opportunity to stabilize their finances and re-established their credit. The great news is that there is an increasing number of non-Qualified Mortgage (QM) products that allow as little as 12 months since a past foreclosure or default. This new trend promises enhanced homeownership oppor - tunities for millions of previously troubled borrowers. There is a prevailing perception that past credit issues can doom one's chances at future homeown- ership. There is also a general lack of understanding about non-QM mortgage products, which many lenders consider overly risky when the market is in a recovery phase. These negative perceptions will not disappear overnight—but there are brighter days ahead. The Coming Credit Explosion S ince the term "non-QM" was coined in 2014, most banks and Wall Street companies have shied away from the non-QM loan segment, and many have opted not to offer such products altogether. Consequently, we saw few rated non-QM securitiza- tions last year. But that is likely to change in 2018. Over the past two years, in fact, the industry has seen a slow yet steady expansion of non-QM prod - ucts as creditor overlays decreased. Today, there is a much greater product mix available to lenders, particularly in the wholesale and TPO markets. Brokers are also back, now that they have a more extensive selection of investors for partnership. There has even been a healthy infusion of new products that allow less stringent appraisal requirements, higher loan bal - ances and minimal reserves. New products that allow non-occupant co-signers are back, too. After the housing crash, there was a gap in the market making it difficult for self-employed peo - ple, including those with home equity and plentiful reserves, to obtain home loans. With the new bank statement programs, this gap is closing for people who may have complicated business returns, but their strong business and per - sonal bank accounts ensure capac- ity to service the debt. Also, there are asset dissipation loans for the rising number of baby boomers in their retirement stage. These individuals may have significant personal assets, but they do not have regular wages as investment assets make up the majority of their income. With the slow acceleration of the non-QM sector, a buzz in the air suggests 2018 could be the breakout year many of us have been waiting for. The increasing number of non-QM securitiza - tions, backed by breakthroughs in credit decision-making, also point to further signs of life. All of this is taking place without pushing too many envelopes or any overly aggressive risk-taking from a loan quality standpoint. The industry is making robust and support - able underwriting decisions and forging strong matches between products that offer broader credit requirements to deserving bor- rowers. In the near future, credit will remain tight overall. But if securi- tization continues to expand–and I believe it will–we will start to see more significant players like BlackRock and Goldman stepping into the non-QM space. If that happens, the market could really take off, and we shall be able to place millions of credit-worthy consumers into homes they can afford to keep for decades. The Mortgage Makeover With non-qualified mortgage products busting open the doors to homeownership, its time to dispel the myth that non-QM is the new subprime. By Joe Lam